「華人戴明學院」是戴明哲學的學習共同體 ，致力於淵博型智識系統的研究、推廣和運用。
The purpose of this blog is to advance the ideas and ideals of W. Edwards Deming.

2012年5月11日 星期五

well-tested academic theories can help them succeed not just in business, but in life.

Clayton Christensen's "How Will You Measure Your Life?"

Published:

May 9, 2012

Executive Summary:

World-renowned innovation expert Clayton M. Christensen explores the personal benefits of business research in the forthcoming book How Will You Measure Your Life?
Co-authored with James Allworth and Karen Dillon, the book explains how
well-tested academic theories can help us to find meaning and happiness
not just at work, but in life. This excerpt describes how marginal
thinking can lead to personal, professional, and moral failure.

About Faculty in this Article:

Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School.

Editor's note:
Every year, HBS Professor Clayton Christensen teaches students that
well-tested academic theories can help them succeed not just in
business, but in life. He expounds upon those lessons in his
forthcoming book, How Will You Measure Your Life? Co-authored
with James Allworth (MBA 2010) and Karen Dillon, the book uses
meaningful corporate and personal anecdotes to extoll the value of
theory in finding and creating happiness."You'll see that without theory, we're at sea without a map or a
sextant," Christensen writes. "If we can't see beyond what's close by,
we're relying on chance—on the currents of life—to guide us."Christensen also believes that certain common business principles
are misguided and even dangerous. In the following excerpt, he explains
why focusing on marginal costs and revenues can lead to personal,
professional, and moral failure.

The Trap of Marginal Thinking

In
the late 1990s, Blockbuster dominated the movie rental industry in the
United States. It had stores all over the country, a significant size
advantage, and what appeared to be a stranglehold on the market.
Blockbuster had made huge investments in its inventory for all its
stores. But, obviously, it didn't make money from movies sitting on the
shelves; it was only when a customer rented a movie that Blockbuster
made anything. It therefore needed to get the customer to watch the
movie quickly, and then return it quickly, so that the clerk could rent
the same DVD to different customers again and again. It wasn't long
before Blockbuster realized that people didn't like returning movies
quickly, so it increased late fees so much that analysts estimated that
70 percent of Blockbuster's profits were from these fees.
Set against this backdrop, a little upstart called Netflix emerged in
the 1990s with a novel idea: rather than make people go to the video
store, why don't we mail DVDs to them? Netflix's business model made
profit in just the opposite way to Blockbuster's. Netflix customers paid
a monthly fee-and the company made money when customers didn't watch
the DVDs that they had ordered. As long as the DVDs sat unwatched at
customers' homes, Netflix did not have to pay return postage-or send out
the next batch of movies that the customer had already paid the monthly
fee to get.

"As Blockbuster learned the hard way, we end up paying for the full cost of our decisions, not the marginal costs, whether we like it or not."

It was a bold move: Netflix was the quintessential David going up
against the Goliath of the movie rental industry. Blockbuster had
billions of dollars in assets, tens of thousands of employees, and 100
percent brand recognition. If Blockbuster decided it wanted to go after
this nascent market, it would have the resources to make life very
difficult for the little start-up.
But it didn't.
By 2002, the upstart was showing signs of potential. It had $150
million in revenues and a 36 percent profit margin. Blockbuster
investors were starting to get nervous—there was clearly something to
what Netflix was doing. Many pressured the incumbent to look more
closely at the market. "Obviously, we pay attention to any way people
are getting home entertainment. We always look at all those things," is
how a Blockbuster's responded in a 2002 press release. "We have not seen
a business model that is financially viable in the long term in this
arena. Online rental services are 'serving a niche market.' "
Netflix, on the other hand, thought this market was fantastic. It
didn't need to compare it to an existing and profitable business: its
baseline was no profit and no business at all. This "niche" market
seemed just fine.
So, who was right?
By 2011, Netflix had almost 24 million customers. And Blockbuster? It declared bankruptcy the year before.
Blockbuster's mistake? To follow a principle that is taught in every
fundamental course in finance and economics. That is, in evaluating
alternative investments, we should ignore sunk and fixed costs, and
instead base decisions on the marginal costs and revenues that each
alternative entails. But it's a dangerous way of thinking. Almost
always, such analysis shows that the marginal costs are lower, and
marginal profits are higher, than the full cost.
This doctrine biases companies to leverage what they have put in
place to succeed in the past, instead of guiding them to create the
capabilities they'll need in the future. If we knew the future would be
exactly the same as the past,that approach would be fine. But if the
future's different—and it almost always is—then it's the wrong thing to
do. As Blockbuster learned the hard way, we end up paying for the full cost of our decisions, not the marginal costs, whether we like it or not.

You End Up Paying the Full Price Anyway

Case studies such as this one helped me resolve a paradox that has
appeared repeatedly in my attempts to help established companies that
are confronted by disruptive entrants—as was the case with Blockbuster.
Once their executives understood the peril that the disruptive attackers
posed, I would say, "Okay. Now the problem is that your sales force is
not going to be able to sell these disruptive products. They need to be
sold to different customers, for different purposes. You need to create a
different sales force." Inevitably they would respond, "Clay, you have
no idea how much it costs to create a new sales force. We need to
leverage our existing sales team."
The language of the disruptive attackers was completely different:
"It's time to create the sales force." Hence, the paradox: Why is it
that the big, established companies that have so much capital find these
initiatives to be so costly? And why do the small entrants with much
less capital find them to be straightforward?
The answer lies in their approach to marginal versus full costs.
Every time an executive in an established company needs to make an
investment decision, there are two alternatives on the menu. The first
is the full cost of making something completely new. The second is to
leverage what already exists.
Almost always, the marginal-cost argument overwhelms the full-cost.
When there is competition, and this thinking causes established
companies to continue to use what they already have in place, they pay
far more than the full cost—because the company loses its
competitiveness. As Henry Ford once put it, "If you need a machine and
don't buy it, then you will ultimately find that you have paid for it
and don't have it." Thinking on a marginal basis can be very, very
dangerous.

An Unending Stream of Extenuating Circumstances

This marginal-cost argument applies the same way in choosing right
and wrong: it addresses a question I discuss with my students: how to
live a life of integrity—and stay out of jail. The marginal cost of
doing something "just this once" always seems to be negligible, but the
full cost will typically be much higher. Yet unconsciously, we
will naturally employ the marginal-cost doctrine in our personal lives. A
voice in our head says, "Look, I know that as a general rule, most
people shouldn't do this. But in this particular extenuating
circumstance, just this once, it's okay." And the voice in our head
seems to be right; the price of doing something wrong "just this once"
usually appears alluringly low. It suckers you in, and you don't see
where that path is ultimately headed or the full cost that the choice
entails.

"The marginal cost of doing something 'just this once'
always seems to be negligible, but the full cost will typically be much
higher."

Recent years have offered plenty of examples of people who were
extremely well-respected by their colleagues and peers falling from
grace because they made this mistake. Nick Leeson, the
twenty-six-year-old trader who famously brought down British merchant
bank Barings in 1995 after racking up $1.3 billion in trading losses
before being detected, suffered exactly this fate and talks about how
marginal thinking led him down an inconceivable path. In hindsight, it
all started with one small step: a relatively small error. But he didn't
want to admit to it. Instead, he covered it up by hiding the loss in a
little-scrutinized trading account. It led him deeper and deeper down a
path of deception.
He lied to cover lies; he forged documents, misled auditors, and made
false statements to try to hide his mounting losses. Eventually, he
arrived at his moment of reckoning. He was arrested at the airport in
Germany, having fled his home in Singapore. As Barings realized the
extent of Leeson's debt, it was forced to declare bankruptcy. The bank
was sold to ING for just 1 pound. Twelve hundred employees lost their
jobs, some of them his friends. And Leeson was sentenced to six and a
half years in a Singaporean prison.
How could hiding one mistake from his bosses end up leading to the
undoing of a 233-year-old merchant bank, a conviction and imprisonment
for fraud, and ultimately the failure of his marriage? It's almost
impossible to see where Leeson would end up from the vantage point of
where he started—but that's the danger of marginal thinking.
As soon as he took that first step, there was no longer a boundary
where it suddenly made sense to turn around. The next step is always a
small one, and given what you've already done, why stop now? Leeson
described the feeling of walking down this dark road in an interview
with the BBC: "[I] wanted to shout from the rooftops … this is what the
situation is, there are massive losses, I want it to stop. But for some
reason you're unable to do it."

100 Percent of the Time Is Easier Than 98 Percent of the Time

Many of us have convinced ourselves that we are able to break our own
personal rules "just this once." In our minds, we can justify these
small choices. None of those things, when they first happen, feels like a
life-changing decision. The marginal costs are almost always low. But
each of those decisions can roll up into a much bigger picture, turning
you into the kind of person you never wanted to be.
I came to understand the potential damage of "just this once" in my
own life when I was in England, playing on my university's varsity
basketball team. It was a fantastic experience; I became close friends
with everyone on the team. We killed ourselves all season, and our hard
work paid off-we made it all the way to the finals of the big
tournament. But then I learned that the championship game was scheduled
to be played on a Sunday. This was a problem. At age sixteen, I had made
a personal commitment to God that I would never play ball on Sunday
because it is our Sabbath.
So I went to the coach before the tournament finals and explained my
situation. He was incredulous. "I don't know what you believe," he said
to me, "but I believe that God will understand." Every one of the guys
on the team came to me and said, "You've got to play. Can't you break
the rule, just this one time?"
It was a difficult decision to make. The team would suffer without
me. The guys on the team were my best friends. We'd been dreaming about
this all year. I'm a deeply religious man, so I went away to pray about
what I should do. As I knelt to pray, I got a very clear feeling that I
needed to keep my commitment. So I told the coach that I wasn't able to
play in the championship game.
In so many ways, that was a small decision—involving one of several
thousand Sundays in my life. In theory, surely I could have crossed over
the line just that one time and then not done it again. But looking
back on it, I realize that resisting the temptation of "in this one
extenuating circumstance, just this once, it's okay" has proved to be
one of the most important decisions of my life. Why? Because life is
just one unending stream of extenuating circumstances. Had I crossed the
line that one time, I would have done it over and over and over in the
years that followed.
And it turned out that my teammates didn't need me. They won the game anyway.
If you give in to "just this once," based on a marginal-cost
analysis, you'll regret where you end up. That's the lesson I learned:
it's easier to hold to your principles 100 percent of the time than it
is to hold to them 98 percent of the time. The boundary—your personal
moral line—is powerful because you don't cross it; if you have justified
doing it once, there's nothing to stop you doing it again.
Decide what you stand for. And then stand for it all the time.